Posted by: usset001 | June 29, 2009

The 11th Commandment and corn

cornfieldThe corn market is in “contango,” i.e. showing positive carrying charges, even from old crop Jul’09 futures to new crop Dec’09 contract. This adds a little twist to our analysis of the 11th Commandment in corn; “Thou shall not hold unpriced grain in the bin after July 1.”

In my last post, I focused on the current large inverse in soybean futures; the spot price of soybeans is about 150 cents over the new crop Nov’09 contract. By harvest you can expect a southern Minnesota/northern Iowa soybean basis of 50 cents under the Nov’09 contract. I expect the soybean basis to weaken $2 between now and the third week of September. How’s that for an old crop/new crop transition?

But the corn market is in positive carrying charge mode. The corn basis is many parts of southern Minnesota is currently about 35 cents under the Jul’09 contract. The carrying charge from Jul’09 to Dec’09 is about 20 cents, so the current basis translates to about 55 cents under the Dec’09 contract. What is the bid for new crop delivery of corn? 50-55 cents under the December contract speaks for much of southern Minnesota.

Here’s the lowdown on corn and the 11th Commandment. Unlike soybeans, your basis risk on unpriced corn held in storage is minimal – the spot market for corn and for new crop delivery are both trading at or near 55 cents under. Your risk in old crop unpriced corn is in the futures price. On Friday, the Dec’09 corn contract closed at $4.04 per bushel. Since 1990, the December corn contract has traded lower in 2 of 3 years from the first week of July to the second week of October.

Even with minimal basis risk, I’m paying attention to the 11th Commandment.

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